Musings on economics and politics, with a special interest in free banking and monetary disequilibrium.

Saturday, January 12, 2013

More on the Platinum Coin "Scheme."

The statute that authorizes the issue of platinum coins is 31 USC § 5112 - Denominations, specifications, and design of coins. The subsections run from a to v, and the relevant section is k.

(k)The Secretary may mint and issue platinum bullion coins and proof platinumcoins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

This provision stands out in the code because it is so simple and short.

5112 begins with:

(a)The Secretary of the Treasury may mint and issue only the following coins:(1)a dollar coin that is 1.043 inches in diameter.(2)a half dollar coin that is 1.205 inches in diameter and weighs 11.34 grams.(3)a quarter dollar coin that is 0.955 inch in diameter and weighs 5.67 grams.(4)a dime coin that is 0.705 inch in diameter and weighs 2.268 grams.(5)a 5-cent coin that is 0.835 inch in diameter and weighs 5 grams.(6)except as provided under subsection (c) of this section, a one-cent coin that is 0.75 inch in diameter and weighs 3.11 grams.(7)A fifty dollar gold coin that is 32.7 millimeters in diameter, weighs 33.931 grams, and contains one troy ounce of fine gold.(8)A twenty-five dollar gold coin that is 27.0 millimeters in diameter, weighs 16.966 grams, and contains one-half troy ounce of fine gold.(9)A ten dollar gold coin that is 22.0 millimeters in diameter, weighs 8.483 grams, and contains one-fourth troy ounce of fine gold.(10)A five dollar gold coin that is 16.5 millimeters in diameter, weighs 3.393 grams, and contains one-tenth troy ounce of fine gold.(11)A $50 gold coin that is of an appropriate size and thickness, as determined by the Secretary, weighs 1 ounce, and contains 99.99 percent pure gold.(12)A $25 coin of an appropriate size and thickness, as determined by the Secretary, that weighs 1 troy ounce and contains .9995 fine palladium.

Note the "only." The coins described from 1 to 6 are circulating coins, though there is nothing that differentiates them from the gold coins from 7 to 12, except notice that these coins are made of gold of a particular fineness. And then, last but not least, there is a palladium coin whose fineness is specified. The bullion value of these gold coins and the palladium coin are much greater than their face values.

The material used to make the first six circulating coins is not specified in a, but that is covered next.

(b)The half dollar, quarter dollar, and dime coins are clad coins with 3 layers of metal. The 2 identical outer layers are an alloy of 75 percent copper and 25 percent nickel. The inner layer is copper. The outer layers are metallurgically bonded to the inner layer and weigh at least 30 percent of the weight of the coin. The dollar coin shall be golden in color, have a distinctive edge, have tactile and visual features that make the denomination of the coin readily discernible, be minted and fabricated in the United States, and have similar metallic, anti-counterfeiting properties as United States coinage in circulation on the date of enactment of the United States $1 Coin Act of 1997. The 5-cent coin is an alloy of 75 percent copper and 25 percent nickel. In minting 5-cent coins, the Secretary shall use bars that vary not more than 2.5 percent from the percent of nickel required. Except as provided under subsection (c) of this section, the one-cent coin is an alloy of 95 percent copper and 5 percent zinc. In minting gold coins, the Secretary shall use alloys that vary not more than 0.1 percent from the percent of gold required. The specifications for alloys are by weight.

There was a bit more detail about the gold alloy, but most of this is very detailed about the circulating coins. However, the next section allows for some discretion:

(c)The Secretary may prescribe the weight and the composition of copper and zinc in the alloy of the one-cent coin that the Secretary decides are appropriate when the Secretary decides that a different weight and alloy of copper and zinc are necessary to ensure an adequate supply of one-cent coins to meet the needs of the United States.

So far, it looks like the gold coins and the palladium coin are circulating coins just like the others. However, there is some further clarification about that later. Section d covers the such important matters as insisting that "In God We Trust" is on the coins, and the like. Sections e - g are interesting, because they allow for silver coins.

(e)Notwithstanding any other provision of law, the Secretary shall mint and issue, in qualities and quantities that the Secretary determines are sufficient to meet public demand, coins which—(1)are 40.6 millimeters in diameter and weigh 31.103 grams;(2)contain .999 fine silver;(3)have a design—(A)symbolic of Liberty on the obverse side; and(B)of an eagle on the reverse side;(4)have inscriptions of the year of minting or issuance, and the words “Liberty”, “In God We Trust”, “United States of America”, “1 Oz. Fine Silver”, “E Pluribus Unum”, and “One Dollar”; and(5)have reeded edges.(f) Silver Coins.—(1) Sale price.—The Secretary shall sell the coins minted under subsection (e) to the public at a price equal to the market value of the bullion at the time of sale, plus the cost of minting, marketing, and distributing such coins (including labor, materials, dies, use of machinery, and promotional and overhead expenses).(2) Bulk sales.— The Secretary shall make bulk sales of the coins minted under subsection (e) at a reasonable discount.(3) Numismatic items.— For purposes of section 5132(a)(1) of this title, all coins minted under subsection (e) shall be considered to be numismatic items.(g)For purposes of section 5132(a)(1) of this title, all coins minted under subsection (e) of this section shall be considered to be numismatic items.

What is up with this "numismatic" section? This refers to a section of the code allowing "proof sets" of dollars, half-dollars, quarters and dimes to be made of silver and sold on the market. This silver dollars here, which are a bit different, are categorized the same way.

The silver coin program set up here doesn't say that they are not circulating coins, but it is clearly specified that they are to be sold for their bullion value. The size, weight and denomination is fixed, and the market value of the silver is well above the $1 denomination.

The next section, h, is very interesting:

(h)The coins issued under this title shall be legal tender as provided in section 5103 of this title.

And 5103 is:

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts.

Well, "under this title" would include every single letter, including "k". (The platinum coins.)

The gold and palladium coins defined back up in section a did specify their weights, fineness and denominations, but where are all the details specified for the "silver dollars." That is taken care of in i-j, which refers back to the gold coins in section a, and includes:

(i)

(1)Notwithstanding section 5111(a)(1) of this title, the Secretary shall mint and issue the gold coins described in paragraphs (7), (8), (9), and (10) of subsection (a) of this section, in qualities and quantities that the Secretary determines are sufficient to meet public demand, and such gold coins shall—

(A)have a design determined by the Secretary, except that the fifty dollar gold coin shall have—

(i)on the obverse side, a design symbolic of Liberty; and

(ii)on the reverse side, a design representing a family of eagles, with the male carrying an olive branch and flying above a nest containing a female eagle and hatchlings;

(B)have inscriptions of the denomination, the weight of the fine gold content, the year of minting or issuance, and the words “Liberty”, “In God We Trust”, “United States of America”, and “E Pluribus Unum”; and

(C)have reeded edges.

(2)(A)The Secretary shall sell the coins minted under this subsection to the public at a price equal to the market value of the bullion at the time of sale, plus the cost of minting, marketing, and distributing such coins (including labor, materials, dies, use of machinery, and promotional and overhead expenses).(B)The Secretary shall make bulk sales of the coins minted under this subsection at a reasonable discount.(3)For purposes of section 5132(a)(1) of this title, all coins minted under this subsection shall be considered to be numismatic items.

The gold coin program is more or less a word for word a copy of the silver program. One interesting addition is as follows:

4)(A)Notwithstanding any other provision of law and subject to subparagraph (B), the Secretary of the Treasury may change the diameter, weight, or design of any coin minted under this subsection or the fineness of the gold in the alloy of any such coin if the Secretary determines that the specific diameter, weight, design, or fineness of gold which differs from that otherwise required by law is appropriate for such coin.

We are now far from the first part of "a" where only certain coins may be minted. Gold coins of any fineness or size can be made. Naturally, the point of this rule is to allow the Secretary to make whatever gold coins his marketing department believes investors might like.

But what about a $50 gold coin the size of a dime made up of 99% copper alloy and 1% gold? Well, if the sections about pricing are taken literally, then they would have to "sell" them for the cost of production, which could easily be much less than the $50 legal tender face value. (There is a 15% market up for "overhead" which is really profit, apparently.)

Anyway, the very next section is "k" which allows the Secretary of the Treasury to make up whatever kind of platinum coins he likes. Because of "h" they are all legal tender.

Most importantly, there is nothing about price at which they must be sold, their weights, or denominations. None of the restrictions and rules that Congress put on the other coin are there. There is nothing about them being numismatic items.

While these coins are not listed under "a" 1, 2, 3, 4, 5, and 6, there is nothing that says that they cannot be circulating coins.

So, a platinum coin made up of 1 ounce of platinum, worth about $1,500, could be denominated at $10,000, $10 million, $10 billion, or $1 trillion.

Now, it does say that these are "bullion coins" or "proof coins." However, the gold and silver coins that are described in such detail don't say anything about being "bullion coins." (The Mint's marketing material for all of these coins does describe the concept of "bullion coin" but that appears to have no standing in the authorizing legislation.)

In my view, the platinum statute was poorly constructed.

What about issuing the actual circulating coins?

a)The Secretary of the Treasury—

(1)shall mint and issue coins described in section 5112 of this title in amounts the Secretary decides are necessary to meet the needs of the United States;

(2)may prepare national medal dies and strike national and other medals if it does not interfere with regular minting operations but may not prepare private medal dies;

(3)may prepare and distribute numismatic items; and

(4)may mint coins for a foreign country if the minting does not interfere with regular minting operations, and shall prescribe a charge for minting the foreign coins equal to the cost of the minting (including labor, materials, and the use of machinery).

(b)The Department of the Treasury has a coinage metal fund and a coinage profit fund. The Secretary may use the coinage metal fund to buy metal to mint coins.The Secretary shall credit the coinage profit fund with the amount by which the nominal value of the coins minted from the metal exceeds the cost of the metal. The Secretary shall charge the coinage profit fund with waste incurred in minting coins and the cost of distributing the coins, including the cost of coin bags and pallets. The Secretary shall deposit in the Treasury as miscellaneous receipts excess amounts in the coinage profit fund.

And so, Congress carelessly gave the Secretary of the Treasury authority to mint whatever platinum coins he likes. They can have as little actual platinum in them as he sees fit, and can be as high of denomination as he chooses. He can issue all he thinks are necessary. And the difference between the cost of producing them and their face value becomes revenue that the Treasury can use to cover government expenses.

As I have explained before, the existing rules make it possible to fund the government by issuing the dollar coins described in a 1.

Of course, waiting for the Fed to order up the coins would not do. The Treasury would need to either spend the coins directly or deposit them at the Fed. And using $1 coins would be costly.

I would think that the "best" way for the Treasury to use platinum coins to fund spending would be to make them with a small platinum content (and lots of alloy,) and a face value useful for paying off government bonds as they come due--$1,000.

In my view, the immediate problem was careless statute construction. But the more serious problem is that the U.S. has an inadequate monetary constitution.

The simplest approach would be to include the face value of all coins as part of the national debt and so include them under the national debt limit. Alternatively, the coins could be made into Federal Reserve tokens. They would be purchased by the Fed from the Treasury at cost, so the Treasury would not directly profit from issuing them. As usual, any added profit made by the Fed would be transferred back to the Treasury.

Of course, the Fed still needs to be appropriately constrained so that it provides an appropriate nominal anchor for the economy. There is no substitute for a decent monetary constitution.

The Treasury owes the Fed more than $1.6 trillion. While it isn't all coming due at once, the Treasury could pay it all off with dollar coins. It appears to me they could mint up high denomination platinum coins to make the payments as well. The Fed would have to accept them.

If the Fed expected that this would be the consequence of refusing to pay for a single one trillion dollar platinum coin when requested (just as they pay for the dollar coins, quarters, dimes, nickels and cents today,) why wouldn't they just accept the inevitable.

That no one is willing to use a coin with a bullion value of $1,500 to make a payment of $50 tells us nothing about the ability of people to use a coin with a bullion value of 20 cents and a face value of $1 to make a payment of one dollar. And that is why a coin with a $1,500 bullion value and a $1 trillion face value can make a payment of $1 trillion.

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